Corporate governance in banking: The role of the board of directors

We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors’ ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.     

Board of Directors and CSR in Banking: The Moderating Role of Bank Regulation and Investor Protection Strength

This paper brings together research on boards of directors as the backbone of corporate governance and corporate social responsibility (CSR) practices in the banking industry. The underlying idea is that some characteristics of bank boards, in particular independence and gender diversity, may impact the CSR commitments of banks. By making use of a sample of 159 banks in nine countries during the period 2004–2010, our empirical evidence suggests that banks with more independent directors and more female members on their boards incline toward socially responsible behaviour. Our results also suggest that institutional factors play a significant role in these effects. They show that in greater regulatory and stronger investor protection environments, board independence and gender diversity have more influence on the social behaviour of banks.     

Board structure and market performance: Does one solution fit all?

We investigate the relationship between internal corporate governance and market performance across multiple countries, utilizing a comprehensive data set comprising 77,440 firm observations from 15 European Union countries over the period 2002-2018. Specifically, we examine the impact of board characteristics, including size, independence, gender diversity, CEO duality, and classified boards, on market performance. Our findings reveal that CEO duality is generally negatively related to returns, whereas independent directors and board diversity are positively related to market performance. We observe a positive association between staggered boards and market performance as well as Tobin's Q, aligning with the EU's emphasis on stakeholder investments. Upon analyzing the data at the country level, we identify that the links between board structure and performance vary by country, and there isn't a single variable that is consistently related to market returns or Tobin's Q. These divergent findings indicate that there is no universally applicable corporate governance solution that can be recommended for companies throughout Europe.     

Performance and governance in microfinance institutions

We examine the relationship between firm performance and corporate governance in microfinance institutions (MFI) using a self-constructed global dataset on MFIs collected from third-party rating agencies. Using random effects panel data estimations, we study the effects of board and CEO characteristics, firm ownership type, customer-firm relationship, and competition and regulation on an MFI’s financial performance and outreach to poor clients. We find that financial performance improves with local rather than international directors, an internal board auditor, and a female CEO. The number of credit clients increase with CEO/chairman duality. Outreach is lower in the case of lending to individuals than in the case of group lending. We find no difference between non-profit organisations and shareholder firms in financial performance and outreach, and we find that bank regulation has no effect. The results underline the need for an industry specific approach to MFI governance.     

Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?

The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.     

How do female directors improve board governance? A mechanism based on norm changes

Prior literature documents that corporate boards with female directors produce better governance outcomes than all-male boards. However, female directors constitute the minority on most boards, which precludes majority voting as the mechanism through which they change board decisions. We identify changing the norms of how the board works as this mechanism. Using the market for norms framework, we explain how female directors are effective even without possessing a board majority or other sources of symbolic power, such as hierarchical authority and social gravitas. Empirically, we show that independent female directors, compared to their male counterparts, are more effective at changing board norms (board processes) and improving governance (board outputs).     

The Effects of Outside Directors and Board Shareholdings on the Relation Between Chief Executive Compensation and Firm Performance

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.     

Risk management,corporate governance,and bank performance in the financial crisis

The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.     

Are Busy Boards Effective Monitors?

Firms with busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak corporate governance. These firms exhibit lower market‐to‐book ratios, weaker profitability, and lower sensitivity of CEO turnover to firm performance. Independent but busy boards display CEO turnover‐performance sensitivities indistinguishable from those of inside‐dominated boards. Departures of busy outside directors generate positive abnormal returns (ARs). When directors become busy as a result of acquiring an additional directorship, other companies in which they hold board seats experience negative ARs. Busy outside directors are more likely to depart boards following poor performance.     

Board composition,grey directors and corporate failure in the UK

This study examines the effect of board composition on the likelihood of corporate failure in the UK. We consider both independent and non-independent (grey) non-executive directors (NEDs) to enhance our understanding of the impact of NEDs' personal or economic ties with the firm and its management on firm performance. We find that firms with a larger proportion of grey directors on their boards are less likely to fail. Furthermore, the probability of corporate failure is lower both when firms have a higher proportion of grey directors relative to executive directors and when they have a higher proportion of grey directors relative to independent directors. Conversely, there is a positive relationship between the likelihood of corporate failure and the proportion of independent directors on corporate boards. The findings discussed in this study support the collaborative board model and the view that corporate governance reform efforts may have over emphasised the monitoring function of independent directors and underestimated the benefits of NEDs' affiliations with the firm and its management.     

Corporate governance and the timeliness of corporate internet reporting by U.K. listed companies

This study is an examination of the timeliness of corporate internet reporting by U.K. companies listed on the London Stock Exchange (LSE). The research examines the significance of several corporate governance and firm-specific characteristics as potential determinants of the timeliness of corporate internet reporting.Our primary analysis provides evidence of a significant association between timely corporate internet reporting and the corporate governance characteristics of board experience and board independence. Our findings provide evidence that boards with less cross directorships, more experience in terms of the average age of directors, and lower length in service for executive directors provide more timely corporate internet reporting. We find that board independence is negatively associated with timely corporate internet reporting.Follow-up analysis provides additional evidence of a significant association between the timeliness of corporate internet reporting and board experience. The evidence indicates that role duality and block ownership are associated with less timely corporate internet reporting.Our findings also reveal strengths and weaknesses in the Internet reporting of U.K. listed companies. Companies need to voluntarily focus on improving the timeliness dimension of their corporate internet reporting so that the EU and U.K. accounting regulators do not replace recommendations with regulations.     

Corporate Governance and Firm Performance in Iran

This study uses data from companies listed in the Tehran Stock Exchange (TSE) for the years 2005–2006 to investigate the role of corporate governance indices on firm performance. We use board size, board independence, board leadership and institutional investors on the board as corporate governance indices and EPS, ROA and ROE as firm performance surrogates. Our regression results show that board size is negatively associated with firm performance. Moreover, the presence of outside directors strengthens the firms' performance. We find, however, no relationship between leadership structure and firm performance. Likewise, the presence of institutional investors on the board of directors is not positively associated with firm performance.     

Ownership, Governance, and Bank Performance: Korean Experience

The paper examines the effect of ownership and governance on firm performance. Tracing the post financial crisis experience, 1998–2002, of the Korean commercial bank industry, the paper investigates whether the involvement of foreign investors in the ownership structure had any significant effect on the banks' performance i.e., return and risk measures. Further, it examines the effects of the presence of outside directors, especially directors from foreign countries, in the corporate board structure impacts banks performance. Evidence indicates that the extent of the foreign ownership level, not the mere existence of foreign ownership, has a significant positive association with the bank return and a significant negative association with the bank risk. The number of outside board of directors does not have any significant affect on performance however the presence of a foreign director on that board is significantly associated with bank return and risk. These findings are relatively robust under the different specifications of performance measures.     

THE ACTIVE BOARD OF DIRECTORS AND ITS EFFECT ON THE PERFORMANCE OF THE LARGE PUBLICLY TRADED CORPORATION

In recent years, boards of directors have become more active and independent of management in pursuing shareholder interests. But, up to this point, there has been little empirical evidence that active boards help companies produce higher rates of return for their shareholders. In this article, after describing the new board activism, the authors argue that past failures to document an association between independent boards and superior corporate performance can be explained by two features of the research: its concentration on periods prior to the 1990s (when most boards were largely irrelevant) and its use of unreliable proxies (such as a minimum percentage of outside directors) for a well-functioning board.
The authors hypothesize that an independent and resourceful board takes steps that require management to increase earnings available to investors. To test this hypothesis, the performance of a sample of large U.S. corporations was examined over the period 1991-1995 using two proxies for the "professionalism" of each company's board: (1) the letter grades (A+ to F) assigned by CalPERS for corporate governance; and (2) a "presence" or "absence" grade based on three key indicators of professional board behavior. Both of these governance metrics were associated in statistically significant ways with superior corporate performance, as measured by earnings in excess of cost of capital and net of the industry average. While acknowledging that such results do not prove causation, the authors conclude that, in the first half of the 1990s, corporations with active and independent boards added significantly more value for shareholders than those with passive, "rubber-stamp" boards.     

Corporate board and board committee independence,firm performance,and family ownership concentration: An analysis based on Hong Kong firms

This study examines whether the relationship between corporate board and board committee independence and firm performance is moderated by the concentration of family ownership. Based on a sample of Hong Kong firms, we find no significant association between the independence of corporate boards or board committees and firm performance in family firms, whereas board independence is positively associated with firm performance in non-family firms. Additionally, our findings show that the proportion of independent directors on the corporate boards of family firms is lower than that of non-family firms, but we find no significant difference in the representation of independent directors on the key committees of corporate boards between family and non-family firms. Overall, these results suggest that the “one size fits all” approach required by the regulatory authorities for appointing independent directors on corporate boards may not necessarily enhance firm performance, especially for family firms. Thus, the requirement to appoint independent directors to the corporate boards of family firms needs to be reconsidered.     

Female tainted directors,financial reporting quality and audit fees

This paper examines the association between the presence of female tainted directors on corporate boards and audit committees and (1) financial reporting quality and (2) audit fees. Female tainted directors are defined as female directors who have been directors of the firms that have previously been involved in financial failures and integrity indiscretions. Using real earnings management and audit fees as proxies for effective governance and board reputation, we find that firms with female tainted directors have higher real earnings management and higher audit fees. However, since prior literature has demonstrated that audit fees are higher for firms with female directors because female directors demand better auditing, we corroborate a supply-side effect of auditors charging higher audit fees when female tainted directors exist. We demonstrate this by showing that while there is an association between audit fee and real earnings management, this association is higher for firms with female tainted directors. Arguably, the governance and reputational benefits of female directors on boards are negated if such directors have tarnished professional reputations.     

Exploring the Board Structures and Member Profiles of Top ASX Companies in Australia: An Industry‐level Analysis

Using published data from the top 166 ASX companies and 1244 corporate board members, this paper presents an industry‐level analysis of board structures and member profiles, and assesses them in terms of the ASX (2014, 2003) principles and recommendations. The analysis reveals that the average board size was seven, non‐executive director (NED) representation on boards was 70%, women held 14% of seats on corporate boards, 17% of NEDs were women and 2% of firms had chairperson/CEO duality positions. The Financial, Industrial and Energy sectors consisted of a majority of executive directors from business and the accounting field and NEDs from the engineering field with work experience of 20 to 30 years. A greater degree of diversity in the field of study and previous experience in the same and different sectors was found in relation to board members in the majority of industrial sectors. The analysis reveals that board characteristics such as board size, having a clear majority of NEDs on boards, decreasing trends in chairperson/CEO duality position, board member diversity in terms of qualifications and previous experience in the same and different sectors were largely consistent with the ASX principles and corporate governance practices.     

The connection between gender diversity and firm performance: Evidence from Taiwan

This paper examines the factors influencing female board membership in Taiwan over the period from 1996 through 2017 and the potential impact of female board representation on firm performance. With 16,477 firm-year observations, our findings show that Taiwanese firms with higher board independence and institutional ownership tend to have lower female board representation. In examining performance implications, the results suggest that board gender diversity is positively associated with firm performance overall. This positive relationship is even stronger in small firms, where female directors may have more influence. In subsample analysis based on lowest and highest ultimate control ownership, we document that the positive impact of board gender diversity is mainly driven by firms that have high ultimate control ownership. Our findings suggest that, in environments with weak corporate governance, female board members may act as effective monitors, especially in smaller firms. Regulators and firms in developing economies with weak corporate governance environment should encourage gender diversity on boards.     

An Examination of Multiple Governance Forces within Bank Holding Companies

This study explores multiple means of governance and monitoring in bank holding companies and their impact on performance and executive compensation. We exploit variables unique to the banking industry to aid in our understanding of this simultaneous relationship. Our primary finding is that after controlling for both regulatory oversight and capital market discipline, a strong board is associated with higher firm performance, lower levels of executive pay and lower growth rates of executive pay. The findings support the fundamental role of corporate governance in overseeing management and ultimately firm performance.     

Bank board structure and performance: Evidence for large bank holding companies

The subprime crisis highlights how little we know about bank governance. This paper addresses a long-standing gap in the literature by analyzing the relationship between board governance and performance using a sample of banking firm data that spans 34 years. We find that board independence is not related to performance, as measured by a proxy for Tobin’s Q. However, board size is positively related to performance. Our results are not driven by M&A activity. But, we provide new evidence that increases in board size due to additions of directors with subsidiary directorships may add value as BHC complexity increases. We conclude that governance regulation should take unique features of bank governance into account.